An extremist, not a fanatic

November 29, 2013

It is surely relevant to a conversation about equality that as many as 16% of our species have an IQ below 85, while about 2% have an IQ above 130.

It might be relevant, but not in the way he intends.

The fact that 16% have IQs below 85 tells us not about people, but about the way standard IQ tests are constructed. They are designed so that it's always the case that 16% have a sub-85 IQ. This doesn't mean that IQ is fixed; the Flynn effect tells us it isn't.

However, whilst the distribution of IQs is fixed, the distribution of income isn't. The share going to top incomes - which I think is the relevant one in this context given Mr Johnson's talk of the 2% with IQs above 130 - shows a big U-shape over the last century.

Of course, it could be that what's changed is the payoffs to IQ. The collapse in demand for unskilled workers in the west since the 1970s and rise in "winner-take-all" markets might mean that low-IQ is now penalized more than it was in the 60s and 70s, whilst a high IQ reaps bigger rewards.

Whilst these trends are undoubtedly important, I'm not sure they are strongly related to IQ. The correlation between IQ and incomes is low; many bosses, remember, fail basic maths. And insofar as there is a correlation, it is due in part to poverty causing low mental functioning and IQ tests favouring richer people's minds rather than to IQ causing income. In implying otherwise, Mr Johnson seems to be making that common error of the rich, of confusing success and merit.

But let's assume all this is false, and there were a link between IQ and inequality. Would this then mean inequality is tolerable? Not at all, for two reasons.

First, a link between IQ and income does not - in itself - tell us anything about the justice of a social system. If a dictator allocated jobs according to IQ, or if high-IQ people were better at stealing from others, there'd be a strong link between IQ and income. But this wouldn't mean the systems were just.

Secondly, a person's IQ is (largely) beyond their control. And one common principle of justice is that people should not suffer because of things they cannot control. If you think low IQ causes poverty, therefore, you might well reasonably think there's a strong case for redistribution. As John Rawls said, the distribution of talent is "arbitrary from a moral point of view":

There is no more reason to permit the distribution of income and wealth to be settled by the distribution of natural assets than by historical and social fortune. (A Theory of Justice, p74).

Sure, Rawls might be wrong. But this should be argued for - and Mr Johnson doesn't do this.

In claiming that IQ is relevant to a conversation about equality, then, Mr Johnson is wrong empirically. And even if he were right, IQ would be relevant in the opposite way from which he intends - because inequality of IQ might actually justify more egalitarian policies, and not an acceptance of inequality.

November 28, 2013

In his recent speech (pdf), Boris Johnson demonstrates a first-class mind - such a mind being one that tell its audience what it wants to hear. He says:

Some measure of inequality is essential for the spirit of envy and keeping up with the Joneses that is, like greed, a valuable spur to economic activity.

In part, this is a straw man; nobody is arguing for complete equality. It poses - but does not answer - the question: is the inequality we now have conducive to growth or not?

Two big things suggest not. First, GDP growth recently - and for that matter before the crisis - has been poor even as inequality, as measured by the share of incomes going to the top 1%, has risen. Secondly, we enjoyed decent growth in the 50s and 60s when inequality was lower than it is now.

Of course, these two facts prove nothing. There are countless possible influences upon trend GDP other than inequality, and it's probably impossible to control for them all. But they do hint at something - that perhaps there are some mechanisms offsetting the ones Mr Johnson mentions. And these might cause inequality - beyond some point - to depress growth (pdf). These are:

- The urge to keep up with the Joneses doesn't just spur useful work. It might also encourage people to get into debt to spend as much as the rich, and this can (perhaps) lead to over-gearing and a financial crisis. The experience of the 00s might not be the only data-point here. Rising inequality in the 1920s also ended in depression.

- Inequality might be a symptom of a dysfunctional economic and political system. If we have monopoly or other market failure and/or crony capitalism, we'll see some mega-rich people, but not a thriving economy.

- Inequality might itself create dysfunctional politics. If the poor push for redistributive policies which weaken investment incentives, or if the rich use their wealth to buy political favours, growth will suffer.

Now, I don't say this to claim that inequality is always and everywhere bad for growth. I do so merely to suggest that Mr J was expressing a very partial point of view, and was simplifying horribly. It's a good job he is merely a minor local politician who isn't in charge of anywhere important.

November 27, 2013

Rick's lovely account of how computers enabled him to write should remind us of a more general point - that luck determines pretty much all of our economic fate.

The standard Mincer equations express individual earnings as a function of schooling and exprience - and, in more sophisticated versions, of personality or cognitive skills as well. Even these leave a huge chunk of earnings' varation across individuals' unexplained - suggesting that luck plays a big role*.

However, these equations under-estimate the role of luck, because luck helps determine how much human capital we acquire in the first place. I'm thinking of several mechanisms here:

- When you were born. Rick was lucky enough to be born near enough to the computer age.Had he been born a few decades earlier, he'd never have unleashed his writing "talent.**" This point extends. In the 50s, only a few people could get to university. Now, many more can - which gives late developers especially more advantage. (It is of course, trivial that when you were born also affects the returns to your human capital; top footballers and CEOs earn more now than 40 years ago because their skills are in demand, not because they are necessarily more skilled than their predecessors.)

- The month you were born in. People born in September earn more than those born in the summer, perhaps because they are bigger and older for their school year, and so do better at school.

- Where you were born. I'm rich because I was born in England, not Ethiopia. Herbert Simon estimated that at least 90% (pdf) of the incomes of western individuals are due to this fortune of birth.

- Genes. Michael Young described meritocrats as members of the "lucky sperm club." He was surely right. If I'd inherited my dad's criminal tendencies rather than my mum's unimaginative sense of duty, I'd be very different***.

- Child poverty. Children from poor homes do worse in school (pdf) and later life - on average! - than those from wealthy homes. Although this doesn't seem to greatly affect life-satisfaction in adulthood, childhood emotional health does.

- The luck of getting a sympathetic teacher or good role models. Pretty much every successful person can point to these, surely.

- Chance meetings. Harry Markowitz has said that a "chance conversation" led him to study portfolio theory for which he won a Nobel prize. The story is surely typical; how many of us got valuable early experience simply because a job interviewer liked the cut of our gib, or were denied it because he didn't?

I suspect that pretty much all the differences between our incomes are due to luck; a capacity for hard work is also a matter for luck. We do not "deserve" our economic fate, and only the most witlessly narcissistic libertoon could claim otherwise.

Now, it doesn't follow automatically from this that the tax system should equalize incomes. As Nozick argued, people can be entitled to things they don't deserve. And justice is not the only virtue; efficiency might require some differences in post-tax income.

What it does mean is that the rich and successful should be more humble.

* The low R-squareds aren't necessarily all an indicator of luck. Earnings might vary for people of similar human capital because of differences in their choices of compensating advantages.

** The scare quotes are because of my scepticism about the nature of talent, not because of any lack of esteem for Rick.

*** I don't know if criminality is heritable, and don't much care; I'm speaking loosely.

November 26, 2013

Is "secular stagnation" a state of the world or a state of our minds? I ask for two different - indeed, contradictory - reasons.

The first is inspired by papers (pdf) by Ulrike Malmenider and Stefan Nagel and by Henrik Cronqvist and colleagues. They both show that our attitudes to the economy - as measured by how we invest our money - are shaped by experiences in our impressionable years. People who experience recessions in their formative years tend to be more risk-averse than those who enjoyed better times. They invest less in equities and less in growth stocks than more favoured generations.

And here's the thing. A lot of the talk of stagnation comes from those of us aged between around 45-60. We were scarred by the collapse of the Golden Age of capitalism in 1973 and/or by the recessions of the early 80s. These experiences disposed many of us to be "glass half-empty" kind of people - or, as our younger colleagues say, miserable old gits. It might be, therefore, that we are pessimistic not just because of the facts, but because of the legacy of our early experiences.

This is not the only way in which early-life experiences shape economic attitudes. It has been argued that one reason why inflation stayed low during the full employment years of the 50s and 60s was that workers' memories of the mass unemployment of the 30s depressed wage militancy. As those workers retired, to be replaced by those who had known only good times, the fear of unemployment receded and wage militancy rose.

I could push this hypothesis further. It's 45-60 year-olds who dominate corporate boardrooms and hence investment decisions. It might therefore be that capital spending is low because it is decided by people scarred into pessimism.

This, though, might be a stretch; bosses are, in part, selected for overconfidence and this selection effect mitigates the cohort effect.

There is, though, a second mechanism here. Why is investment so low? Standard explanations focus upon the dearth of (monetizable) investment opportunities due in part to slower technical change (pdf). But there might be something else at work. A few years ago William Nordhaus wrote:

Only a miniscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers.

It might be that bosses have wised up to this - not so much because they've read Nordhaus but because they've learned from experience. If so, the problem isn't so much that technical progress has slowed, but that it never really paid in the first place and bosses have now learnt this and so cut investment. If so, stagnation is the result of rational learning.

My point here is a trivial one. Talk about stagnation - whether you're arguing for it or not - is talk not just about the world, but about our beliefs. And we should think about how these are shaped.

November 25, 2013

Viewers of Dominic Sandbrook's series on the Cold War get the impression that the Cold War was a fight between freedom and totalitarianism which the latter lost. However, some things I've seen recently make me suspect that it was the totalitarians who really won.

One is Puffles' description of the Labour party's hapless efforts to use social media. He points out that the party's aim to "dominate the conversation" is simply oxymoronic, and suggests - echoing Jeffrey Nielsen - that one reason for the decline of grassroots party activists is a dissatisfaction with ‘top down’ "oppressive discipline".

Secondly are a series of accounts of the decline of British universities.The Telegraph reports that "university leaders" are condoning gender segregation in debates; Adam Ramsey describes how heavy-handed university "security" is suppressing protest; and Nick Cohen says:

Instead of producing confident students who can handle any argument you throw at them, universities are a production line for cowed conformists. Instead of being free spaces where ideas can be debated without restraint, universities have become like the private and public bureaucracies the young will go on to join: speak out of turn, or even wear the wrong T-shirt, and the bosses will make you suffer.

These stories have something in common. They both show how managerialist ideology is being extended into places where it doesn't belong. Political activism and social media lend themselves best to loose egalitarian networks, not to top-down management - which is why big business so often makes an arse of itself on Twitter. And universities should be repositories of liberal values which recognize that intelligent young people are (or should be) fractious, noisy and rebellious, not production lines for conformists run by control freaks with a phobia of disorder who kowtow to their most frightening customers.

And this is why I say the totalitarians have won. A totalitarian is a fanatic who believes that one ideology should dominate society. And (some) managerialists are - in this sense - totalitarians, who have extended top-down control freakery to places where it is counter-productive and destructive of traditional values.

Which raises a paradox. During the Cold War, it was believed that Marxists were the totalitarians and capitalists were on the side of pluralism. Today, though, it is the other way around. At least one Marxist is siding with pluralism, whilst it is the boss class that are the totalitarians.

November 23, 2013

We should distinguish between macro- and microeconomic failure. That's the lesson I take from this exchange betweenFrances and Tim.

Let's use Tim's barbecue metaphor. Comparative advantage requires that the idiot cousin - call him Kostas - does something mundane like shape the beef patties, whilst the skilled cook - call him Jurgen - does fancy things with the barbecue.

However, this might mean that Kostas doesn't have much to do. This'll be especially the case if Jurgen's on a diet and doesn't want to eat much.

There's a danger, therefore, of Kostas getting into trouble. Worse still, if Jurgen insists that Kostas only eats as much as he contributes to the barbecue, Kostas will be ill-fed.

What can we do about this?

We could plonk him in a deckchair and ply him with Pimms. But Jurgen hates idleness and doesn't want to see his Pimms go down the gullet of layabouts. Sure, his feelings are irrational. But he's a stubborn fellow and there's no shifting him.

Instead, Kostas might be able to beg for other menial jobs, but there's no reason to suppose this will be enough to keep him employed.The idea that people can get work if only they accept sufficiently demeaning conditions is a just-so story without historical or theoretical foundation.

Alternatively, Kostas could leave the barbecue. But it's not obvious he'll find a better one, and even if he can, the bus fare to get there will be expensive, and Jurgen might have to help pay it.

Instead, there's a simple answer here - to have a bigger barbecue. If Jurgen came off his diet and ate more burgers, there'd be more for Kostas to do.

The problem with our barbecue, therefore is a macro one, not a micro one. Jurgen and Kostas are doing the right jobs; there's no failure of comparative advantage. The problem is simply that the barbecue isn't big enough. What we have here is exactly the problem Keynes identified:

I see no reason to suppose that the existing system seriously misemploys the factors of production which are in use...When 9,000,000 men are employed out of 10,000,000 willing and able to work, there is no evidence that the labour of these 9,000,000 men is misdirected. The complaint against the present system is not that these 9,000,000 men ought to be employed on different tasks, but that tasks should be available for the remaining 1,000,000 men. It is in determining the volume, not the direction, of actual employment that the existing system has broken down.

Now, in saying this I don't mean that the theory of comparative advantage is correct. It isn't. There's less (pdf) trade in some ways than the theory predicts, and more trade within industries and between neighbouring countries. Some guy got a Nobel in 2008 for analyzing these issues.

What I do mean is that we don't need to reinvent the wheel. Some problems have a simple economic solution, and are not a sign that conventional economics is wrong. The problem with our barbecue is one of morality more than economics.

November 22, 2013

The journalist's fallacy is the name I gave to the habit of drawing strong inferences from only one or two data-points. We've seen two nice examples of it this week, from left and right.

From the left, we have Seamus Milne. He points to Manchester University students who are campaigning for a more pluralistic economics curriculum as a sign that "orthodox economist have failed their own market test. Granted, he could have widened the evidence base; there's a similar movement at Cambridge, at least. But he omits two facts:

- Demand to study ("orthodox") economics at university has risen 33% in the last six years, whilst applications to university generally are up by only 19%.

- At least two universities - Oxford and Manchester; I know coz I took 'em - used to offer courses in the history of economic thought, but dropped them in part for lack of demand.

These two facts suggest that demand for "orthodox" economics is strong. It's too damned strong in my book, but things are as they are, not as we'd like them to be. (And anyway, the truth or not of "orthodox" economics is not to be decided by what undergraduates think.)

From the right, we have Melanie Phillips' attempt to tell us that the Paul Flowers affair tells us something about the broader liberal-left. But she doesn't point that many Labour and Coop members are not financially illiterate drug-takers, nor that - perhaps! - some on the right might be. She doesn't even try to fill in the Bayesian boxes. Granted, she might have cited Hayek's "Why the worst get on top", but that could apply - as he says - to "any society."

There are thousands of coops in the UK, and only one (or a few) Paul Flowers. The question - which is of fundamental importance - is: are coops more efficient than capitalistic firms? This cannot be settled merely by pointing to any individual personal failure, but by wider statistical research.

Seamus and Melanie are committing a similar error. Both are inferring too much from individual examples - an error exacerbated by wishful thinking. They are neglecting the very useful advice offered in this great piece in nature - that "data can be dredged or cherry picked."

Now, you might object here that pointing out that Seamus and Melanie have limited powers of ratiocination is the epitome of lazy blogging. It is, but there's a more general point here. It's that Seamus and Melanie have successful journalistic careers whereas I don't. One reason (of several!) for this is that the lively human interest anecdote is more vivid and interesting than dull statistics; admit it, you'd rather read about Flowers' porn habit than about the relative productivity of worker- versus capitalist-owned firms. And journalism is about giving readers what they want, not about high-minded logic and evidence.

All of which makes me suspect that Noah Smith might have added something here.

November 21, 2013

Aside from the allegations of sexism, Larry Summers and Russell Brand don't seem to have much in common. But they do. Summers' talk of secular stagnation corroborates the idea that politicians are out of touch not just with voters but with reality.

The thing is, there is nothing much new in what Summers says. Ben Bernanke's famous "investment dearth" speech was made eight years ago, and UK firms' capital spending has been lagging behind retained profits for over a decade. The lack of investment which lies behind sluggish growth is an old problem.

But it's one our political class barely discusses. Tories seem unaware that the stagnation of the pre-recession years refutes the notion that lowish taxes and a quiescent workforce are sufficient to boost investment. And Labour and - more bizarrely still some of the broader left - seem to think austerity is the cause of our problems rather than an exacerbating symptom of them. The question: "what if trend growth is very low?" doesn't seem to be on the agenda.

What if it were? The answers, I suspect, would fall into two sorts.

One would be to pay more attention to ways of increasing trend growth. These might include supply-side socialism, a greater socialization of investment and perhaps bigger government. They would also include - as Duncan stresses - policies which ensure that companies are run for the long-term, rather than in the short-term interests of rent-seekers.

However, the fact that national long-run growth rates have not been greatly affected by government policies in the past warns us that such measures might not be enough.

Which leads to the second set of questions: if we are stuck in low trend growth, how can we minimize the pain of this? Questions of how to achieve efficient redistribution, and how to pool economic risks thus become more important. Basic income, anyone?

But the mere raising of these issues only shows that there's a massive gulf between the petty preoccupations of the political class (which includes the mainstream media) on the one hand, and the scale of our economic problems on the other.

For a long time, mainstream party politics has assumed that the private sector will deliver decent long-run economic growth if only it can get the right conditions. The possibility that this assumption is wrong is one the political elite doesn't seem much interested in. As Mr Brand said, the political system is apathetic to the needs of the people.

November 20, 2013

Many people are averse to taking responsibility. That's the message of some new research led by Georg Weizsacker. He and his colleagues show that many prefer to randomize their choices rather that make them themselves even if doing so reduces expected utility. This is true not just in laboratory experiments but in important real-life choices such as university applications. This, he suggests, is because people are regret-averse; they fear they'll kick themselves if they make a wrong choice, and so choose randomness to minimize such regret.

This finding is consistent with two big political absences - that there's little demand for greater worker democracy, despite evidence that this might be more efficient than more hierarchical firms; and that there's little demand for direct democracy despite evidence (pdf) that it can improve well-being.

Perhaps an (irrational) aversion to responsibility explains these absences; as I said yesterday, the problem with democracies isn't politicians so much as voters.

Herein, though, lies a paradox. Whilst people seem happy to shun responsibility in at least some spheres, there is no demand for the explicit introduction of deliberate randomness into public affairs. For example, there are no calls for sortition, even though it has some advantages; see Jon Elster's Solomonic Judgements for a longer discussion.

There is, I fear, a simple solution to this paradox. Whilst people don't want responsibility for themselves, they are keen to hand it to others rather than accept dumb luck. It could be that our desire for bosses - in politics and at work - arises from the same motive as the desire for a planned economy rather than the chaos of the market, or the belief in God. They are all examples of an urge that someone take responsibility rather than that we rely upon impersonal forces. Humankind cannot bear very much randomness.

November 19, 2013

Sevenscore and ten years ago today, Abraham Lincoln coined the phrase "government of the people, by the people, for the people." He omitted to add that the people can be systematically wrong, as a new paper neatly shows.

Michela Redoano and colleagues estimate that, in the UK, women whose husbands died in the previous two years are 10-12% less likely to vote for the government than other women. There's a simple reason for this. The less happy people are, the more likely they are to vote for opposition parties; this is a variant of the affect heuristic. But people don't distinguish fully between being unhappy and being unhappy because of bad government. As a result, they - in effect - blame the government for things it is not responsible for.

This is not an isolated finding. Christopher Achen and Larry Bartels have found (pdf) that voters, in effect, blame governments for things they cannot control such as natural disasters. And Neil Malhotra and colleagues show that surprise victories for the local team in US college football games increase support for incumbents in gubernatorial, presidential and senatorial elections. This is consistent with the fact that Harold Wilson blamed Peter Bonetti for losing him the 1970 general election.

I suspect that UK governments have long tried to exploit this misattribution effect.One reason why they prefer to hold elections in the spring is that lighter nights improve our mood, which makes us better inclined towards incumbents. It's no accident that the preferred month to hold general elections - May - is also the month in which share prices often peak.

You might object that the bias from this source is small. Maybe. But if voters are irrational in this respect, isn't it likely they'll be irrational in others. It's insufficiently appreciated that the problem with democracy is not just the shortcomings of our politicians, but those of the voters too.